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claimed a bad debt deduction on Schedule C in the amount of
$1,000 relating to the surrendered deposit. Upon examination,
respondent disallowed the claimed bad debt deduction, asserting
that petitioners had not established that the forfeited deposit
constituted a bad debt or was otherwise deductible.
As a general rule, section 166 allows a deduction for any
bad debt that becomes worthless during the taxable year. Sec.
166(a)(1). To establish entitlement to a bad debt deduction, a
taxpayer must prove that a bona fide debt existed, and that the
debt became worthless in the year that the deduction is claimed.
Rule 142(a); American Offshore, Inc. v. Commissioner, 97 T.C.
579, 593 (1991); sec. 1.166-1(c), Income Tax Regs. A bona fide
debt is defined as one which arises from a debtor-creditor
relationship based upon a valid and enforceable obligation to pay
a fixed or determinable sum of money. Sec. 1.166-1(c), Income
Tax Regs.
Petitioner admitted at trial that his deposit was properly
surrendered, and that he was not entitled to a return of the
proceeds. Therefore, the forfeited deposit did not give rise to
a claim for a bad debt deduction under section 166.
Upon petitioner's admission at trial that he was not
entitled to a return of the deposit, we asked petitioner to
explain the basis of characterizing the forfeited deposit as a
bad debt. In response, petitioner stated: "I expended [the
deposit]. I -- I spent the money in trying to pursue a
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